Learn How the Draw Process Works in Your Real Estate Renovation Projects

Are you familiar with how the draw process works? 

Many aspiring investors have questions about all related lending terms and the draw process is an integral part. 

Understanding how your operation should be conducted, in connection with your draw process, is a vital portion of your investment career. 

Of course, the movement of money is always important, right!

Join us today for some crucial pointers in real estate investing for beginners.

Let’s get started…

Funding Source

When you align your funding sources, the sources will inform you on how their process looks.

Not all funding relationships are the same. There are private money sources that may be more, or less, flexible depending on the relationship and your experience.

Usually, funding will support in the range of 50-100% of the purchase price, and 75% to 100% of the rehab costs.

Within these parameters, the entire borrowed amount usually needs to be between 65% to 85% of the ARV (or after repair value). 

Provided you meet all eligibility terms from the lender, you will qualify.

Terms

Within the qualification process, you will be informed on terms. 

These usually include:

• Appraisal Fee
• Down Payment Requirement
• Occupancy Requirement Prior to Payoff
• APR Percentage & Points at Closing
• Policy Insurance Requirement
• Transaction Fee at Closing
• Percentage support of ARV, LTV or LTC
• Percentage support of rehab funds
• Payment due dates and penalties
• Term length of loan
• Draw Process Information (for the rehab)

Some lenders may require a loan origination fee, but most only require upfront fees of an appraisal and transaction fee. 

Be careful with lenders who are asking for more than this upfront. Verify their legitimacy and that they actually close. 

There is predatory lending practices out there that collect a lot of money up front and never fund the deal. Leaving you at the closing table and never committing – escaping with your up front fees.

Let’s cover best practices for managing the renovation project. Afterall, this is directly tied to the draw process.

The draw process is when the lender requires you start by paying for the rehab out of pocket and the lender reimburses you as portions of the project are completed as per your scope of work. The submission for this request is referred to a draw, due to you drawing reimbursement rehab funds from the lender.

Now, lets cover project management.

Project Management

Within your operation, it is important that you evaluate your order of operations and plan how you need to conduct the renovation based upon meeting project completion expectations along with the draw process.

Again, the draw process is where the lender reimburses you for out of pocket repair costs that are outlined in your scope of work. 

As a requirement, the lender will expect an outline of the entire project and the cost of each portion of the project.

This is called the scope of work. Either you or your contractor can create this.

When the project’s proposal is submitted, the scope of work is a determining factor in making sure you are adding enough value for the asset to reach the ARV expected and your cost of completion is accurate. 

The lender will usually hire an appraiser, to evaluate your renovation plan and confirm you will meet the projected ARV.

An appraiser will also usually review each draw when you express a portion of the project being completed.

Draw Process

After your project has been funded, the operation is now up to you. Be sure to perform adequately to support best business practices. Being efficient and also effective are both vital.

As portions of the project are completed, and you submit for your draw, the appraiser comes out to verify completion of the requested line-items and confirms if your draw request should be granted.

Draw fees are normally about $100 – $200 each and can either have a limit or unlimited.

If your project’s renovation is approximately, $30,000, then perhaps you’ll plan to request 3 draws of $10,000 each as scopes of work are completed. If you haven’t read our article Fix and Flip Order of Operations, it will be very helpful to your planning techniques.

Be mindful that as you pay for the repairs out of pocket, and the scopes of work are completed, the draws can be requested and reimbursed. Key word – completed! 

Most lenders are not going to reimburse on a partially completed scope of work.

Example

Your kitchen has an expense of $15,000 which includes, new countertop, sink, faucets, appliances, flooring, cabinets and paint as per the scope of work. However you submit for the draw, mentioned that it is completed. But the cabinets are not installed yet and the paint isn’t complete either. Most likely, you lender will deny your request for a draw reimbursement due to the kitchen not being complete. As per your scope of work, all the items mentioned where issued to be completed to the lender for the cost of $15,000. Since they are not complete, the draw isn’t accepted. Also if the kitchen costs more or less compared to the scope of work, the amount on the scope of work will be reimbursed.

All these factors, are important for good preparation and planning.

Planning Tip –

A key portion that many investors fail to plan for is all the upfront costs before any renovation begins. Things like locksmith, demo, clean out, and rough preparation costs before any renovation occurs. These line items need to be accounted for in your scope of work and in your draw process. Demolition in itself can be very costly. Not planning for reimbursement for this portion can increase your out of pocket costs significantly if not planned for. Plan ahead.

Conclusion

Overall, you should be certain your planned operation is in synch with your draw process. 

Be sure to communicate with you contractor the expected order of operations. 

Incomplete scopes of work, where you plan to complete a draw and your contractor doesn’t follow suit can cause much unplanned out of pocket costs. 

Unplanned out of pocket costs can be very detrimental to your sustainability and success.

Meeting monetary expectations will be an integral part of your project and investing career.

We hope this article has been helpful for you today. Thanks for joining us faithful readers-future leaders.

Love ya and keep striving for growth. 

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Please comment you experience in the draw process, success and nightmares.